Quarterly Update

Jan. 2019

Dividend Growth Chugs Along Despite Market Jitters

Key Points

Volatility can obscure strong company performance

Earnings growth supports rising dividend yields

Selectivity is key in identifying dividend growers

Most major market indexes were negative for 2018 in a year marked by increased volatility, especially in the fourth quarter. Despite this, the stocks in City National Rochdale’s High Dividend Income strategy continued their healthy performance. Based on equity prices, one might expect slowing dividend growth rates or even dividend cuts, but operationally this was not at all the case for the companies in our portfolios.

Looking more closely at our stocks in the Consumer Staple, Utility, and REIT sectors—all three being major dividend producing sectors—we see that the growth in free cash flow and in increased dividends exceeded the six-month total return in all of the sectors (see first chart). In other words, given market conditions, our stocks in three key income sectors accrued value as their yields and dividend growth increased more than their stock prices. In our view, this accrued valuation makes our names more compelling for investors looking for attractive yields that can rise with economic growth.

We believe it’s important to focus on the growth rate of dividends, especially during choppy equity markets. As the U.S. economy continues to modestly advance, the companies we hold have been able to increase their dividends near the higher end of our preferred range of 4-8%. Moreover, analysts currently project annual earnings growth of 9.5% for our stocks over the next two years (see second chart). These cash flow streams enable us to project one-year forward returns of 6-8% for our holdings. While markets can be volatile, we have very high confidence in our estimates of aggregate yield and the growth of our companies’ cash flows.

Our view is that strong cash flows, coupled with solid growth rates, should help drive the attractive total returns the City National Rochdale High Dividend Income strategy has achieved in the past, especially given accrued values. The key is identifying undervalued, high-quality companies with solid prospects for future dividend growth under most conceivable economic environments.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

Index Definitions

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

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